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Capital Markets

Bond Outlook April 12th

The US economic model is the greatest wheeze ever, or a disaster in the making. Which is your belief? And do ever-increasing bond yields affect your (and the market’s) answer?

Bond Outlook [by bridport & cie, April 12th 2006]

Two views of the same situation:

 

  • The USA is very inventive and technologically advanced. Its businesses design high-value products, have them made in low-cost countries, especially China (allowing only a small profit to the manufacturer), realise a massive corporate profit, and see that profit multiplied by increases in the value of their stock. This more than compensates for the absence of tradition savings, which are offset by increased asset values, and lets the USA maintain its high standard of living indefinitely. This view is from both from Gave-Kal and CastleRock, and held widely.

  • The low interest rates of recent years have led to too much household borrowing, excessive property investment, overpriced share values and dependency by Americans on other countries’ savings for their spending. Six time bombs are now ticking: house prices, US shares, the USD, junk bonds, China itself, and the spiralling costs related to Iraq and any adventure into Iran. This view is articulated by Agora, but is basically the one we have been putting forward for many months.

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